Wednesday, August 20, 2008

The Reserve Bank has fingered Australia’s private banks as partly responsible for the tight conditions it says risk pushing Australia into a “deeper and more persistent slowdown”.

The minutes of the August 5 board meeting released after a fortnight in accordance with Reserve Bank protocols show that the board seriously considered cutting rates on August 5.

Its members felt that financial conditions were “clearly quite tight, and effectively getting tighter” without action from the Reserve Bank itself.

Banks had increased their standard variable housing loan rates by an extra 0.15 percentage points in July without reference to the Reserve.

This was part of a “further tightening of financial conditions domestically” over and above that intended by the Bank.

The tightening that concerns the Reserve Bank is understood to relate not only to higher rates, but also to a tightening of access to credit.

At a dinner in Bendigo last month to commemorate the 150th anniversary of the Bendigo Bank the Reserve Bank’s Governor Glenn Stevens pleaded with the banks to continue to lend widely.

While acknowledging that banks needed to be sound he said that soundness was “only one part of the equation”...
“To play its full role in the economy, the financial sector needs also to mobilise savings, putting them in the hands of investors who are in a position to make effective use of them.”

“Banks are in the business of risk management, not complete risk avoidance,” he said.

The August minutes concern that board members were worried conditions had been tightened too far, “given there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect.”

They indicate that there was debate around the boardroom table about whether to cut rates straight away.

On one hand “tighter financial conditions were causing the economy to slow but, on the other hand, the rise in the terms of trade would continue to add substantially to national income and capacity to spend”.

The minutes do not make clear how the board members reconciled these “powerful forces pulling in opposite directions”. In particular they do indicate whether there was division within the board about whether to cut or wait or whether the decision to wait was unanimous.

Among the board members present were the Secretary to the Treasury Ken Henry, the former head of Woolworths-Safeway Roger Corbett and an independently-minded Australian National University academic Warwick McKibbin.

Since the August 5 board meeting bank bill rates and the deposit rates paid by the banks themselves have fallen sharply.

The Reserve Bank’s Assistant Governor Philip Lowe told a conference last week that the 90-day bank bill rate, “often used as an indicator of the bank’s marginal costs of funds” had collapsed 0.50 percentage points.

“That has significantly reduced the banks' marginal cost of short-term funding. There is no obvious reason that the banks could not pass through any change in the cash rate he said.”

The minutes make it clear that the Bank board does intend to begin cutting rates at its meeting next month.

The say without less restrictive conditions “the risk of a deeper and more persistent slowing in the economy would increase.”

A small business survey released yesterday showed both conditions and confidence at their weakest level in at least 12 years.

The Australian Chamber of Commerce and Industry said the September rate cut would be just the first of several needed before the end of the year.

The Housing Industry Association said homebuilding had slowed to a standstill leaving Victoria 6000 homes short what it will need to sustain its population over the next twelve months.
Its findings were backed up in the Reserve Bank’s board minutes which said that Australia’s housing stock was growing noticeably more slowly than long term demand.

Despite this “nationwide house prices were flat in the first half of the year”.

Auction clearances rates in both Melbourne and Sydney were well and the number of properties offered for sale had begun to fall.

Earlier dives in both share prices and house prices “suggested that household net worth had declined by almost 5 per cent” so far this year.